**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-Q**





x
            
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
                EXCHANGE ACT OF 1934For
                the quarterly period ended June 30, 2007ORo
            
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
                EXCHANGE ACT OF 1934For
                the transition period from ________________ to
                ________________





Commission
      file number: 000-32319





**ALLIANCE
      DISTRIBUTORS HOLDING INC.**


(Exact
      name of registrant as specified in its charter)





**Delaware**
            
            **33-0851302**(State
                or other jurisdiction of
            
            (I.R.S.
                Employerincorporation
                or organization)
            
            Identification
                No.)**1160
                Commerce Avenue, Bronx, New York**
            
            **11462**(Address
                of principal executive offices)
            
            (Zip
                Code)





**(718)
      536-2248**


(Registrant’s
      telephone number, including area code)





**[NONE]**


(Former
      name, former address and former fiscal year, if changed since last
      report)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes x
      No o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.  Large
      accelerated filer  o   Accelerated
      filer  o   Non-accelerated
      filer x




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes
o  No
x





Indicate
      the number of shares outstanding of each of the issuer's classes of common
      stock, as of the latest practicable date.





Class
            
            Outstanding
                at July 31, 2007Common
                Stock, $.001 par value per share
            
            49,003,372










Page
                No.PART
                I.FINANCIAL
                INFORMATIONItem
                1-Balance
                Sheets at June 30, 2007 (unaudited) andDecember
                31, 2006 (audited)
            2Statements
                of Operations for the Three and Six MonthsEnded
                June 30, 2007 and 2006 (unaudited)
            3Statement
                of Stockholders’ Equity for the SixMonths
                Ended June 30, 2007 (unaudited)
            4Statements
                of Cash Flows for the Six Months EndedJune
                30, 2007 and 2006 (unaudited)
            5Notes
                to Financial Statements (unaudited)
            6Item
                2
            Management's
                Discussion and Analysis of Financial Conditionand
                Results of Operations
            10Item
                3
            Quantitative
                and Qualitative Disclosures about Market Risk
            16Item
                4
            Controls
                and Procedures
            16PART
                II.OTHER
                INFORMATIONItem
                6
            Exhibits
            16Signatures
            17










**ALLIANCE
      DISTRIBUTORS HOLDING INC.**


**BALANCE
      SHEETS**


**(In
      Thousands, except per share amounts)**





**June
                30,**
            
            **December
                31,****2007**
            
            ******2006**Unaudited
            
            Derived
                from audited financial statements**ASSETS****CURRENT
                ASSETS:**Cash
                and equivalents
            
            $
            438
            
            $
            346Accounts
                receivable-net
            
            
            4,065
            
            
            7,922Inventory
            
            
            4,773
            
            
            9,104Due
                from vendors
            
            
            144
            
            
            83Prepaid
                expenses and other current assets
            
            
            182
            
            
            615Deferred
                income taxes
            
            
            60
            
            
            151**Total
                current assets**
            
            
            9,662
            
            
            18,221**PROPERTY
                AND EQUIPMENT - NET**
            
            
            705
            
            
            752**DEFERRED
                INCOME TAXES**
            
            
            158
            
            
            67**OTHER
                ASSETS**
            
            
            67
            
            
            77**TOTAL**
            
            $
            10,592
            
            $
            19,117**LIABILITIES
                AND STOCKHOLDERS' EQUITY****CURRENT
                LIABILITIES:**Notes
                payable - bank
            
            $
            4,728
            
            $
            7,201Accounts
                payable
            
            
            3,859
            
            
            8,532Current
                portion of long term obligations
            
            
            6
            
            
            11Accrued
                expenses and other current liabilities
            
            
            118
            
            
            99**Total
                current liabilities**
            
            
            8,711
            
            
            15,843**DEFERRED
                LEASE OBLIGATIONS**
            
            
            47
            
            
            40**LONG
                TERM OBLIGATIONS**
            
            
            1
            
            
            4**STOCKHOLDERS'
                EQUITY:**Series
                A Convertible Non-Redeemable Preferred Stock, $.001 par value; 8,513
                and
                8,530 shares authorized; 244 and 262 shares issued and outstanding
                at June
                30, 2007 and December 31, 2006, respectively
            
            
            -
            
            
            -Common
                stock, $.001 par value; 100,000 shares authorized; 49,003 and 48,721
                shares issued and outstanding at June 30, 2007 and December 31, 2006,
                respectively
            
            
            49
            
            
            49Additional
                paid-in capital
            
            
            3,503
            
            
            3,415Accumulated
                deficit
            
            
            (1,719
            )
            
            (234
            )**Total
                stockholders’ equity**
            
            
            1,833
            
            
            3,230**TOTAL**
            
            $
            10,592
            
            $
            19,117





See
      notes
      to financial statements


2


**ALLIANCE
      DISTRIBUTORS HOLDING INC.**


**STATEMENTS
      OF OPERATIONS**


**THREE
      AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006**


**(In
      thousands, except per share amounts)**


(Unaudited)





**Three
                Months**
            
            **Six
                Months****2007**
            
            **2006**
            
            **2007**
            
            **2006****NET
                SALES**
            
            $
            12,499
            
            $
            13,268
            
            $
            28,772
            
            $
            26,587**COST
                OF GOODS SOLD**
            
            
            11,516
            
            
            11,617
            
            
            26,209
            
            
            23,377**GROSS
                PROFIT**
            
            
            983
            
            
            1,651
            
            
            2,563
            
            
            3,210**OPERATING
                COSTS AND EXPENSES:**Selling
                and administrative expenses
            
            
            1,697
            
            
            1,446
            
            
            3,622
            
            
            2,721Terminated
                transaction costs
            
            
            -
            
            
            -
            
            
            -
            
            
            257Other
                income
            
            
            -
            
            
            (109
            )
            
            -
            
            
            (109
            )**Total
                operating expenses**
            
            
            1,697
            
            
            1,337
            
            
            3,622
            
            
            2,869**(LOSS)
                INCOME FROM OPERATIONS**
            
            
            (714
            )
            
            314
            
            
            (1,059
            )
            
            341Interest
                expense
            
            
            178
            
            
            186
            
            
            426
            
            
            374**(LOSS)
                INCOME BEFORE PROVISION FOR (BENEFIT FROM) INCOME
                TAXES**
            
            
            (892
            )
            
            128
            
            
            (1,485
            )
            
            (33
            )Provision
                for (benefit from) income taxes
            
            
            -
            
            
            55
            
            
            -
            
            
            (13
            )**NET
                (LOSS) INCOME**
            
            $
            (892
            )
            $
            73
            
            $
            (1,485
            )
            $
            (20
            )**Net
                loss per share - basic and diluted**
            
            $
            (0.02
            )
            $
            0.00
            
            $
            (0.03
            )
            $
            0.00**Weighted
                average common shares outstanding -****Basic**
            
            
            49,000
            
            
            48,721
            
            
            48,861
            
            
            48,445**Diluted**
            
            
            49,000
            
            
            50,772
            
            
            48,861
            
            
            48,445




See
      notes
      to financial statements


3


**ALLIANCE
      DISTRIBUTORS HOLDING INC.**


**STATEMENT
      OF STOCKHOLDERS' EQUITY**


**SIX
      MONTHS ENDED JUNE 30, 2007**


**(In
      thousands)**


(Unaudited)





Additional
            
            
            
            TotalPreferred
                Stock A
            
            Common
                Stock
            
            Paid
                in
            
            Accumulated
            
            Shareholders’Shares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Deficit
            
            EquityBalance,
                January 1, 2007
            
            
            262
            
            $
            -
            
            
            48,721
            
            $
            49
            
            $
            3,415
            
            $
            (234
            )
            $
            3,230Conversion
                of Series APreferred
                Stock intoCommon
                Stock
            
            
            (18
            )
            
            -
            
            
            282
            
            
            -
            
            
            -
            
            
            -
            
            
            -Stock
                optioncompensation
                expense
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            88
            
            
            
            
            
            88Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,485
            )
            
            (1,485
            )Balance,
                June 30, 2007
            
            
            244
            
            $
            -
            
            
            49,003
            
            $
            49
            
            $
            3,503
            
            $
            (1,719
            )
            $
            1,833




See
      notes
      to financial statements


4





**ALLIANCE
      DISTRIBUTORS HOLDING INC.**


**STATEMENTS
      OF CASH FLOWS**


**SIX
      MONTHS ENDED JUNE 30, 2007 and 2006**


**(In
      thousands)**


(Unaudited)





**2007**
            
            **2006****OPERATING
                ACTIVITIES:**Net
                loss
            
            $
            (1,485
            )
            $
            (20
            )Adjustments
                to reconcile net loss to net cash provided by operating activities:Deferred
                rent
            
            
            7
            
            
            27Depreciation
                and amortization
            
            
            108
            
            
            64Provision
                for doubtful accounts
            
            
            40
            
            
            26Stock
                option compensation expense
            
            
            88
            
            
            111Amortization
                of deferred financing costs
            
            
            58
            
            
            60Deferred
                income taxes
            
            
            -
            
            
            (15
            )Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            3,817
            
            
            1,252Inventory
            
            
            4,331
            
            
            273Due
                from vendors
            
            
            (61
            )
            
            392Prepaid
                acquisition and proposed offering costs
            
            
            -
            
            
            162Prepaid
                expenses and other current assets
            
            
            9
            
            
            (158
            )Accounts
                payable
            
            
            (4,673
            )
            
            (335
            )Accrued
                expenses and other current liabilities
            
            
            19
            
            
            (244
            )Net
                cash provided by operating activities
            
            
            2,258
            
            
            1,595**INVESTING
                ACTIVITIES:**Purchase
                of property and equipment
            
            
            (61
            )
            
            (154
            )Proceeds
                from insurance claim
            
            
            401
            
            
            -Increase
                in other assets
            
            
            -
            
            
            (59
            )****Net
                cash provided by (used in) investing activities
            
            
            340
            
            
            (213
            )**FINANCING
                ACTIVITIES:**Proceeds
                from note payable - bank
            
            
            28,480
            
            
            25,363Repayments
                of note payable - bank
            
            
            (30,953
            )
            
            (26,917
            )Payment
                of deferred financing costs
            
            
            (25
            )
            
            -Payment
                of long-term obligations
            
            
            (8
            )
            
            (6
            )Net
                cash used in financing activities
            
            
            (2,506
            )
            
            (1,560
            )**(DECREASE)
                INCREASE IN CASH AND EQUIVALENTS**
            
            
            92
            
            
            (178
            )**CASH
                AND EQUIVALENTS, BEGINNING OF PERIOD**
            
            
            346
            
            
            252**CASH
                AND EQUIVALENTS, END OF PERIOD**
            
            $
            438
            
            $
            74**SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATION:**Cash
                paid during the period for:Interest
            
            $
            418
            
            $
            340Income
                taxes
            
            $
            15
            
            $
            86


See
      notes
      to financial statements


5





**ALLIANCE
      DISTRIBUTORS HOLDING INC.**


**Notes
      to Financial Statements (unaudited)**





**Note
      1 - THE COMPANY AND INTERIM FINANCIAL STATEMENTS**





Alliance
      Distributors Holding Inc. (the "Company" or "Alliance") is a distributor of
      video game consoles, peripherals, accessories and software to customers
      throughout the United States for most key manufacturers and third party
      publishers in the video game industry. The Company operates as a single segment.





On
      July
      21, 2005, the Company and Abrams/Gentile Entertainment Inc. ("Age") entered
      into
      an operating agreement in which the Company and Age became members in Alliance
      Age LLC, a limited liability company formed in Delaware, to set forth the terms
      on which the parties will develop and commercialize products they mutually
      agree
      upon from time to time. The Company owns 65% of Alliance Age LLC. As of June
      30,
      2007, Alliance Age LLC was inactive.





The
      accompanying unaudited financial statements have been prepared in accordance
      with accounting principles generally accepted in the United States of America
      for interim financial information and pursuant to the rules and regulations
      of
      the Securities and Exchange Commission ("SEC"). Certain information and footnote
      disclosures normally included in financial statements prepared in accordance
      with accounting principles generally accepted in the United States of America
      have been omitted. This Form 10-Q should be read in conjunction with the
      Company's financial statements and notes included in the 2006 Annual Report
      on
      Form 10-K. In the opinion of management, all material adjustments, consisting
      of
      normal recurring adjustments, considered necessary for a fair presentation,
      have
      been included in the accompanying unaudited financial statements.





The
      results of operations for the interim periods are not necessarily indicative
      of
      the results that maybe expected for the full year ending December 31, 2007.





**Note-
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





**Allowance
      for Doubtful Accounts**





The
      Company establishes credit terms for new customers based upon management's
      review of their credit information, and performs ongoing credit evaluations
      of
      its customers, adjusting credit terms when management believes appropriate
      based
      upon payment history and an assessment of their current credit worthiness.
      The
      Company records an allowance for doubtful accounts for estimated losses
      resulting from the inability of its clients to make required payments. The
      Company determines this allowance by considering a number of factors, including
      the length of time trade accounts receivable are past due, previous loss
      history, estimate of the client's current ability to pay its obligation to
      the
      Company, and the condition of the general economy and the industry as a whole.
      While credit losses have generally been within expectations and the provisions
      established, the Company cannot guarantee that credit loss rates in the future
      will be consistent with those experienced in the past. In addition, the Company
      has credit exposure if the financial condition of one of its major clients
      were
      to deteriorate. In the event that the financial condition of its clients were
      to
      deteriorate, resulting in an impairment of their ability to make payments,
      additional allowances may be necessary. It is reasonably possible that the
      Company's estimate of the allowance for doubtful accounts will change. As of
      June 30, 2007 and December 31, 2006, the Company’s allowance for doubtful
      accounts totaled approximately $347,000 and $312,000, respectively.





**Inventory**





Inventory
      consists entirely of finished goods held for sale and is reported at the lower
      of cost or market, on the average cost basis. The Company receives price
      protection from certain of its suppliers for merchandise that may be slow moving
      or aged. The Company evaluates the adequacy of its slow moving or aged inventory
      quarterly and writes down its inventory to fair value based upon the price
      protection received or current market value. While write-downs have been within
      expectations and the provisions established, the Company cannot guarantee that
      it will continue to experience the same level of write-downs as in the past.
      At
      times, the Company makes advance payments to vendors to procure and ensure
      delivery of certain high demand products. Such deposits are reflected as due
      from vendors in the balance sheet. The Company does not offer warranties to
      its
      customers but will accept returns of product claimed to be defective and
      reimburse the customers for the purchase price paid. The majority of the
      Company’s suppliers in turn accept these returns by customers. There are no
      reserves for warranties as of June 30, 2007 and December 31, 2006.




6




**Revenue
      Recognition and Concentration**





The
      Company recognizes sales upon shipment of products to customers as title and
      risk of loss pass upon shipment and collectibility is reasonably assured.
      Provisions for estimated discounts and rebates to customers, estimated returns
      and allowances and other adjustments are provided for in the same period the
      related sales are recorded.





For
      the
      three and six months ended June 30, 2007, one customer accounted for 21% and
      18%
      of total sales. For the six months ended June 30, 2006, a different customer
      accounted for 10% of total sales. No other customer accounted for 10% or more
      of
      the Company’s sales for the three and six months ended June 30, 2007 and
      2006.





**Income
      Taxes**





The
      Company accounts for income taxes using the liability method which requires
      the
      recognition of deferred tax assets or liabilities for the temporary differences
      between the financial reporting and tax bases of the Company's assets and
      liabilities and for tax carry forwards at enacted statutory rates in effect
      for
      the years in which the differences are expected to reverse. The effect on
      deferred taxes of a change in tax rates is recognized in income in the period
      that includes the enactment date. In addition, valuation allowances are
      established when necessary to reduce deferred tax assets to the amounts expected
      to be realized.





The
      Company adopted Financial Accounting Standards Board (“FASB”) Interpretation
      No. 48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes” on
      January 1, 2007. FIN 48 requires companies to determine whether it is “more
      likely than not” that a tax position will be sustained upon examination by the
      appropriate taxing authorities before any tax benefit can be recorded in the
      financial statements. It also provides guidance on the recognition, measurement,
      classification and disclosure in the financial statements for uncertain tax
      positions taken or expected to be taken in a tax return. The adoption of FIN
      48
      did not have an impact on the results of operations or financial position of
      the
      Company.





As
      of
      June 30, 2007 and December 31, 2006, there are no unrecognized tax benefits,
      and
      there have been no income tax related interest or penalties accrued in each
      of
      the three and six months ended June 30, 2007 or 2006. If and when applicable,
      the Company will report interest expense and penalties related to income tax
      liabilities as a component of its provision for income taxes. Tax years
      commencing June 29, 2004, the date the Company elected to become taxed as a
      C
      Corporation, are subject to tax examination.





**Net
      Income (Loss) Per Share**





Basic
      net
      income (loss) per share is computed by dividing net income (loss) by the
      weighted average number of common shares outstanding for the period. Diluted
      net
      income per share is computed by dividing income available to common shareholders
      by the weighted-average number of common shares outstanding during the period
      increased to include the number of additional common shares that would have
      been
      outstanding if the dilutive potential common shares had been issued. The
      dilutive effect of the outstanding options is reflected in diluted earnings
      per
      share by application of the treasury stock method. Diluted net loss per share
      for the three and six months ended June 30, 2007, and for the six months ended
      June 30, 2006 does not include potential common shares derived from stock
      options because their effect would have been antidilutive.





Common
      equivalents for the each of the three and six months ended June 30, 2007 exclude
      approximately 188,000 for common shares issuable upon exercise of warrants
      and
      approximately 2,300,000 common shares issuable upon conversion of Series A
      Convertible Non-Redeemable Preferred Stock since their effect would be
      anti-dilutive. Common equivalents for the six months ended June 30, 2006 exclude
      approximately 1,646,000 for common shares issuable upon exercise of warrants
      and
      approximately 621,000 common shares issuable upon conversion of Series A
      Convertible Non-Redeemable Preferred Stock since their effect would be
      anti-dilutive.





**Stock
      Based Compensation**





The
      Company accounts for stock based employee compensation arrangements in
      accordance with Statement of Financial Accounts Standard (“SFAS”) No. 123(R).,
      which requires companies to recognize the cost of employee services received
      in
      exchange for awards of equity instruments, based on the grant date fair value
      of
      those awards, in the financial statements. For the three months ended June
      30,
      2007 and 2006, share based compensation expense related to the Company’s various
      stock option plans totaling approximately $45,000 and $56,000, respectively,
      is
      included in selling and administrative expenses, and for the six months ended
      June 30, 2007 and 2006, share based compensation expense related to the
      Company’s various stock option plans totaling approximately $88,000 and
      $111,000, respectively, is included in selling and administrative expenses.
      During the six months ended June 30, 2007 and 2006, there were no stock options
      granted.




7





**Note
      3 - FINANCING AGREEMENT**





Effective
      May 11, 2007, the Company amended its financing agreement (the “Agreement”) with
      Rosenthal & Rosenthal, Inc. ("Rosenthal"), pursuant to which the maximum
      credit facility, as defined, was increased from $10,000,000 to $15,000,000
      ($17,500,000 from November 1 to January 31 of each year), the interest rate
      on
      outstanding borrowings was decreased from the prime rate plus 1.5% to the prime
      rate plus 0.75% (but in no event shall the interest rate be less than 4.75%),
      and the termination date was extended to May 31, 2010. Borrowings under the
      credit facility are based on eligible inventory and receivables, are due on
      demand, are secured by substantially all of the assets of the Company and are
      subject to the Company's compliance with certain financial covenants. In
      addition, the Company's CEO and the Company's former President have signed
      limited guaranties in respect of borrowings under the Agreement.





The
      amended Agreement expires May 31, 2010, unless earlier terminated by Rosenthal
      on 30 days' notice. At June 30, 2007, the interest rate on borrowings
      outstanding was 9%. In addition, the Company paid the lender a pro-rated fee
      of
      $25,000 on May 31, 2007, and is obligated to pay on each anniversary date an
      annual fee of 0.25% of the maximum credit facility in effect on such anniversary
      date, as well as a monthly administrative fee of $1,000. The financing expense
      for the annual fee totaled approximately $23,000 and $25,000 for the three
      months ended June 30, 2007 and 2006, respectively, and approximately $48,000
      and
      $50,000 for the six months ended June 30, 2007 and 2006,
      respectively.





In
      connection with establishing the initial Agreement, the Company issued to
      Rosenthal a warrant (the "Warrant") to purchase 500,000 shares of common stock
      at $0.10 per share. The Warrant expires on November 30, 2010. On notice by
      the
      Company the Warrants will expire earlier if the closing price of the common
      stock during a period designated in the Warrants is not less than $0.40 per
      share. The Warrants may be exercised by Rosenthal at $.10 per share for cash
      or
      on a cashless basis (i.e., by deducting from the number of shares otherwise
      issuable on exercise a number of shares that have a then market value equal
      to
      the exercise price). The Company recorded a deferred financing cost of
      approximately $60,000 in the fourth quarter 2004, representing the fair value
      of
      the warrants, which is amortized over the initial three year life of the
      financing agreement. The financing expense recorded for each of the three months
      ended June 30, 2007 and 2006 totaled approximately $5,000 and for each of the
      six months ended June 30, 2007 and 2006 totaled approximately
      $10,000.





Under
      the
      terms of the Agreement, the Company is required to maintain a specified level
      of
      net worth, working capital and debt ratios as defined. As of June 30, 2007
      the
      Company did not comply with certain financial covenants, for which Rosenthal
      has
      provided a waiver. In
      addition, based upon current projections, the Company would require additional
      waivers for financial covenants at the end of the third and fourth quarters
      of
      2007.





The
      Company believes that it will have sufficient liquidity for the next twelve
      months and the foreseeable future. However, the Company would be materially
      and
      adversely affected if Rosenthal demands payment of these borrowings under the
      Agreement and if the Company is unable to refinance these borrowings.





**Note
      4 - INCOME TAXES**





At
      December 31, 2006 the Company had federal and state net operating loss
      carryforwards (NOLs) of approximately $5.5 million. The federal NOLs expire
      in 2023 and the state NOLs expire in 2016. For the six months ended June 30,
      2007, the Company incurred an additional $1.3 million of net operating losses,
      resulting in an increase to its deferred tax asset balance before valuation
      allowance of approximately $535,000. In assessing the realization of deferred
      tax assets, management considers whether it is more likely than not that all
      or
      some portion of the deferred tax assets will not be realized. The ultimate
      realization of the deferred tax assets is dependent upon the generation of
      future taxable income during the periods in which temporary differences are
      deductible and net operating losses are utilized. Based on a consideration
      of
      these factors, the Company has established a valuation allowance of
      approximately $2.9 million and $2.3 million at June 30, 2007 and December 31,
      2006, respectively, due to the uncertainty surrounding the realization of the
      NOLs, approximately $2.3 million of which resulted from a share exchange
      agreement (the “Exchange Agreement”) which occurred on June 17, 2004. The
      valuation allowance increased by approximately $600,000 in the six months ended
      June 30, 2007 because realization of the additional net operating loss
      carryforwards generated in the six months ended June 30, 2007 is uncertain
      based
      upon the Company’s historical operating results.




8





Pursuant
      to Internal Revenue Code (“IRC”) Section 382 of the Tax Reform Act of 1986 the
      utilization of NOLs is limited in the case of certain transactions including
      significant changes in ownership interests. The Company has determined that
      based upon the terms of the Exchange Agreement, an ownership change pursuant
      to
      this Act has occurred. As a result, the NOLs are significantly limited.





**Note
      5 - TERMINATED TRANSACTION COSTS**





On
      April
      26, 2006, the Company announced that it would not acquire Foto Electric Supply
      Co., Inc. (Fesco). An agreement by the Company to acquire Fesco had expired
      by
      its terms on February 28, 2006, and subsequent discussions to extend and amend
      the agreement ended. As a result, the Company recorded a charge of approximately
      $257,000 in the first quarter of 2006 for its costs in the terminated
      transaction. ****





**Note
      6 - OTHER INCOME**





Other
      income in the three and six months ended June 30, 2006was primarily a result
      of
      insurance proceeds for replacement value of assets that were damaged as a result
      of a fire near the Company’s former offices in excess of book
      value.





**Note
      7 - SUBSEQUENT EVENTS**





On
      July
      26, 2007, Andre Muller resigned as a director and officer of the Company. Prior
      to his resignation, Mr. Muller served as a director and its President and Chief
      Operating Officer. Under the terms of an agreement between the Company and
      Mr.
      Muller, the Company will for the period ending July 26, 2008 pay to Mr. Muller
      amounts equal to the salary installments (net of withholding taxes) he would
      have received during this period at the annual rate of $400,000 that applied
      prior to his resignation. In addition, the Company will pay 50% of the cost
      of
      COBRA coverage for the period ending July 26, 2008. The Company will accrue
      approximately $425,000 in connection with Mr. Muller’s separation from the
      Company in the three month period ending September 30, 2007.




9


**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF
      OPERATIONS**





*Disclosures
      in this Form 10-Q contain certain forward-looking statements, including without
      limitation, statements concerning our operations, economic performance, and
      financial condition. These forward-looking statements are made pursuant to
      the
      safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
      The words “estimate,” “believe,” “expect,” and “anticipate” and other similar
      expressions generally identify forward-looking statements, which speak only
      as
      of their dates.*





*These
      forward-looking statements are based largely on our current expectations, and
      are subject to a number of risks and uncertainties, including without
      limitation, risks associated with technological change, competitive factors
      and
      general economic conditions, changes in marketing and distribution strategies
      by
      manufacturers, continued shortages of new platform systems, difficulty in
      integrating and deriving synergies from acquisitions, potential undiscovered
      liabilities of companies that we acquire, changes in our business or growth
      strategy, the emergence of new or growing competitors, various other competitive
      and technological factors, and other risks and uncertainties set forth from
      time
      to time in our filings with the Securities and Exchange
      Commission.*





*Our
      actual results could differ materially from the results referred to in the
      forward-looking statements. In light of these risks and uncertainties, there
      can
      be no assurance that the results referred to in the forward-looking statements
      contained in this release will occur.*





*We
      undertake no obligation to update or review any guidance or other
      forward-looking information, whether as a result of new information, future
      developments or otherwise.*





The
      following discussion of our financial condition and results of operations should
      be read together with the financial statements and related notes included
      elsewhere in this report, and in conjunction with our annual report on Form
      10-K
      for our fiscal year ended December 31, 2006.





**OVERVIEW**





Our
      distribution revenues are derived from the sale of interactive video games
      and
      gaming products for all key manufacturers and third-party software titles,
      accessories and hardware. Operating margins in our distribution business are
      dependent on the mix of software and hardware sales, with software generating
      higher margins than hardware.





**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**





Certain
      of our accounting policies require the application of significant judgment
      by us
      in selecting the appropriate assumptions for calculating financial estimates.
      By
      their nature, these judgments are subject to an inherent degree of uncertainty.
      These judgments are based on historical experience, observation of trends in
      the
      industry, information provided by customers and information available from
      other
      outside sources, as appropriate. Critical accounting policies include:





Revenue
      Recognition - We recognize sales upon shipment of products to customers as
      title
      and risk of loss pass upon shipment and collectibility is reasonably assured.
      We
      provide provisions for estimated uncollectible discounts and rebates to
      customers, estimated returns and allowances and other adjustments in the same
      period the related sales are recorded. While such amounts have been within
      expectations and the provisions established, we cannot guarantee that we will
      continue to experience the same rates as in the past.





Accounts
      Receivable - Accounts Receivable as shown on the Balance Sheet are net of
      allowances and anticipated discounts. We establish credit terms for new
      customers based upon a review of their credit information and perform ongoing
      credit evaluations of our customers, adjusting credit terms when we believe
      appropriate based upon payment history and an assessment of their current credit
      worthiness. The allowance for doubtful accounts is determined through analysis
      of the aging of accounts receivable at the date of the financial statements
      for
      estimated losses resulting from the inability of its clients to make required
      payments. We determine this allowance by considering a number of factors,
      including the length of time trade accounts receivable are past due, previous
      loss history, estimate of the client's current ability to pay its obligation
      to
      us, and the condition of the general economy and the industry as a whole. While
      credit losses have generally been within expectations and the provisions
      established, we cannot guarantee that credit loss rates in the future will
      be
      consistent with those experienced in the past. In addition, we have credit
      exposure if the financial condition of one of our major clients were to
      deteriorate. In the event that the financial condition of its clients were
      to
      deteriorate, resulting in an impairment of their ability to make payments,
      additional allowances may be necessary. It is reasonably possible that our
      estimate of the allowance for doubtful accounts will change. As of June 30,
      2007
      and December 31, 2006, our allowance for doubtful accounts totaled approximately
      $347,000 and $312,000, respectively.




10





Inventories
      - Inventory is stated at the lower of cost or market, cost being determined
      on
      the average cost basis. We receive price protection from certain of our
      suppliers for merchandise that may be slow moving or aged. We evaluate the
      adequacy of our slow moving or aged inventory quarterly and write down inventory
      to fair value based upon the price protection received or current market value.
      While write-downs have been within expectations and the provisions established,
      we cannot guarantee that we will continue to experience the same level of
      write-downs as in the past. We do not offer warranties to our customers but
      will
      accept returns of product claimed to be defective and reimburse the customers
      for the purchase price paid. The majority of our suppliers in turn accept these
      returns by customers. There are no reserves for warranties as of June 30, 2007
      and December 31, 2006.





Income
      Taxes - We account for income taxes using the liability method which requires
      the recognition of deferred tax assets or liabilities for the temporary
      differences between the financial reporting and tax bases of our assets and
      liabilities and for tax carry forwards at enacted statutory rates in effect
      for
      the years in which the differences are expected to reverse. The effect on
      deferred taxes of a change in tax rates is recognized in income in the period
      that includes the enactment date. In addition, valuation allowances are
      established when necessary to reduce deferred tax assets to the amounts we
      expect to realize.





We
      adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48
      (“FIN 48”) “Accounting for Uncertainty in Income Taxes” on January 1, 2007.
      FIN 48 requires companies to determine whether it is “more likely than not” that
      a tax position will be sustained upon examination by the appropriate taxing
      authorities before any tax benefit can be recorded in the financial statements.
      It also provides guidance on the recognition, measurement, classification and
      disclosure in the financial statements for uncertain tax positions taken or
      expected to be taken in a tax return. The adoption of FIN 48 did not have an
      impact on our results of operations or financial position.





As
      of
      June 30, 2007 and December 31, 2006, there are no unrecognized tax benefits,
      and
      no income tax related interest or penalties have been accrued in each if the
      three and six months ended June 30, 2007 or 2006. If and when applicable, we
      will report interest expense and penalties related to income tax liabilities
      as
      a component of our provision for income taxes. Tax years commencing June 29,
      2004, the date we elected to become taxed as a C Corporation, are subject to
      tax
      examination.





**FLUCTUATIONS
      IN OPERATING RESULTS AND SEASONALITY**





We
      have
      experienced fluctuations in quarterly operating results as a result of the
      timing of the introduction of new titles; variations in sales of titles
      developed for particular platforms; market acceptance of our titles; sequels
      or
      enhancements of existing titles; projected and actual changes in platforms;
      the
      timing and success of title introductions by our competitors; product returns;
      changes in pricing policies by us and our competitors; order cancellations;
      and
      delays in product shipment. Sales of our titles are also seasonal, with peak
      shipments typically occurring in the fourth calendar quarter as a result of
      increased demand for titles during the holiday season. Quarterly comparisons
      of
      operating results are not necessarily indicative of future operating results.




11


**RESULTS
      OF OPERATIONS**





Three
      Months Ended June 30, 2007 compared to Three Months Ended June 30,
      2006:





The
      following table shows each specified item as a dollar amount (in thousands)
      and
      as a percentage of net sales for the three months ended June 30, 2007 and 2006,
      and should be read in conjunction with the financial statements included
      elsewhere in this Quarterly Report on Form 10-Q:





**Three
                Months ended March 31,****2007**
            
            **2006**(unaudited;
                dollars in thousands)Net
                sales
            
            $
            12,499
            
            
            100.0
            %
            $
            13,268
            
            
            100.0
            %Cost
                of goods sold
            
            
            11,516
            
            
            92.1
            %
            
            11,617
            
            
            87.5
            %Gross
                profit
            
            
            983
            
            
            7.9
            %
            
            1,651
            
            
            12.5
            %Operating
                costs and expenses:Selling
                and administrative expenses
            
            
            1,697
            
            
            13.6
            %
            
            1,446
            
            
            10.9
            %Other
                income
            
            
            -
            
            
            -
            %
            
            (109
            )
            
            (0.8
            )%Total
                operating costs and expenses
            
            
            1,697
            
            
            13.6
            %
            
            1,337
            
            
            10.1
            %(Loss)
                income from operations
            
            
            (714
            )
            
            (5.7
            )%
            
            314
            
            
            2.4
            %Interest
                expense
            
            
            178
            
            
            1.4
            %
            
            186
            
            
            1.4
            %Loss
                before benefit from income taxes
            
            
            (892
            )
            
            (7.1
            )%
            
            128
            
            
            1.0
            %Provision
                for income taxes
            
            
            -
            
            
            -
            %
            
            55
            
            
            0.4
            %Net
                loss
            
            $
            (892
            )
            
            (7.1
            )%
            $
            73
            
            
            0.6
            %




Net
      sales
      decreased by $769,000, or 6%, from $13,268,000 for the three months ended June
      30, 2006 to $12,499,000 for the three months ended June 30, 2007. The decline
      in
      net sales reflects a $1 million decline in sales to other videogame wholesalers,
      which offset a minimal increase in sales to retail stores.





For
      the
      three months ended June 30, 2007, one customer accounted for 21% of total sales.
      No other customer accounted for 10% or more of the Company’s sales for the three
      months ended June 30, 2007 and 2006.





Cost
      of
      goods sold decreased by $101,000, or 1%, from $11,617,000 for the three months
      ended June 30, 2006 to $11,516,000 for the three months ended June 30, 2007.
      The
      decrease is principally attributable to the decrease in net sales. Gross profit
      as a percentage of net sales decreased to 7.9% for the three months ended June
      30, 2007 from 12.5% for the three months ended June 30, 2006. This decrease
      in
      gross margin reflects lower incentives and allowances provided by vendors,
      resulting in higher cost of goods sold. In addition, shortages of hardware
      units
      and a lighter than normal release schedule forced us to be more aggressive
      in
      our pricing to customers. Cost of goods sold excludes the distribution costs
      of
      purchasing, receiving, inspection, warehousing and handling costs; we include
      these costs in our selling, general and administrative expenses. Our gross
      margins may not be comparable to those of other entities since some entities
      include these distribution costs in the cost of goods sold. Distribution costs
      were approximately $388,000 and $343,000 for the three months ended June 30,
      2007 and 2006, respectively.





Selling
      and administrative expenses increased by $251,000 or 17%, from $1,446,000 for
      the three months ended June 30, 2006 to $1,697,000 for the three months ended
      June 30, 2007. For the three months ended June 30, 2007, selling and
      administrative expenses were comprised of the following: $333,000 in selling
      expenses, $388,000 in distribution costs and $976,000 in administrative
      expenses. For the three months ended June 30, 2006, selling and administrative
      expenses were comprised of the following: $205,000 in selling expenses, $343,000
      in distribution costs and $898,000 in administrative expenses. The increase
      in
      distribution costs totaling approximately $45,000 was primarily attributable
      to
      the increase in warehouse labor costs associated with our Florida operations
      which commenced in September 2006. The increase in selling costs totaling
      approximately $128,000 was primarily attributable to increased direct
      advertising costs. The $78,000 increase in administrative costs is primarily
      attributable to approximately $46,000 in increased rent and utilities
      attributable to new warehouse and showroom facilities in New York and Florida,
      approximately $29,000 for increased payroll and related payroll costs, and
      approximately $21,000 for increased depreciation and amortization principally
      associated with the new facilities. These increases were offset in part by
      reductions in various miscellaneous expenses. Total selling and administrative
      expenses as a percentage of net sales increased to 13.6% for the three months
      ended June 30, 2007 from 10.9% for the three months ended June 30, 2006 due
      to
      the factors previously described, and to a decrease in sales.




12





Other
      income of $109,000 for the three months ended June 30, 2006 was primarily the
      result of insurance proceeds for replacement value of assets that were damaged
      as a result of a fire near the Company’s former offices in excess of book
      value.





Interest
      expense decreased by $8,000, or 4%, from $186,000 for the three months ended
      June 30, 2006 to $178,000 for the three months ended June 30, 2007.





In
      the
      three months ended June 30, 2006, we recognized a tax provision totaling
      $55,000. In the three months ended June 30, 2007 we did not recognize a tax
      benefit because realization of the additional net operating loss carryforwards
      is uncertain.





We
      recorded a net loss of $892,000 in the three months ended June 30, 2007 compared
      to net income of $73,000 in the three months ended June 30, 2006. The principal
      reasons for the decrease in 2007 were the decline in gross profit and the
      increase in selling and administrative expenses.




Six
      Months Ended June 30, 2007 compared to Six Months Ended June 30,
      2006:





The
      following table shows each specified item as a dollar amount (in thousands)
      and
      as a percentage of net sales for the six months ended June 30, 2007 and 2006,
      and should be read in conjunction with the financial statements included
      elsewhere in this Quarterly Report on Form 10-Q:





**Six
                months ended June 30,****2007**
            
            **2006**(unaudited;
                dollars in thousands)Net
                sales
            
            $
            28,772
            
            
            100.0
            %
            $
            26,587
            
            
            100.0
            %Cost
                of goods sold
            
            
            26,209
            
            
            91.1
            %
            
            23,377
            
            
            87.9
            %Gross
                profit
            
            
            2,563
            
            
            8.9
            %
            
            3,210
            
            
            12.1
            %Operating
                costs and expenses:Selling
                and administrative expenses
            
            
            3,622
            
            
            12.6
            %
            
            2,721
            
            
            10.2
            %Terminated
                transaction costs
            
            
            -
            
            
            -
            %
            
            257
            
            
            1.0
            %Other
                income
            
            
            -
            
            
            -
            %
            
            (109
            )
            
            (0.4
            )%Total
                operating costs and expenses
            
            
            3,622
            
            
            12.6
            %
            
            2,869
            
            
            10.8
            %(Loss)
                income from operations
            
            
            (1,059
            )
            
            (3.7
            )%
            
            341
            
            
            1.3
            %Interest
                expense
            
            
            426
            
            
            1.5
            %
            
            374
            
            
            1.4
            %Loss
                before benefit from income taxes
            
            
            (1,485
            )
            
            (5.2
            )%
            
            (33
            )
            
            (0.1
            )%Benefit
                from income taxes
            
            
            -
            
            
            -
            %
            
            (13
            )
            
            (0.0
            )%Net
                loss
            
            $
            (1,485
            )
            
            (5.2
            )%
            $
            (20
            )
            
            (0.1
            )%




13





Net
      sales
      increased by $2,185,000, or 8%, from $26,587,000 for the six months ended June
      30, 2006 to $28,772,000 for the six months ended June 30, 2007. The growth
      in
      net sales primarily resulted from an increase in sales to existing customers,
      as
      well as an increase in our customer base.





For
      the
      six months ended June 30, 2007, one customer accounted for 18% of total sales.
      For the six months ended June 30, 2006, a different customer accounted for
      10%
      of total sales. No other customer accounted for 10% or more of the Company’s
      sales for the six months ended June 30, 2007 and 2006.





Cost
      of
      goods sold increased by $2,832,000, or 12%, from $23,377,000 for the six months
      ended June 30, 2006 to $26,209,000 for the six months ended June 30, 2007.
      The
      increase is principally attributable to the increase in net sales. Gross profit
      as a percentage of net sales decreased to 8.9% for the six months ended June
      30,
      2007 from 12.1% for the six months ended June 30, 2006. This decrease in gross
      margin reflects lower incentives and allowances provided by vendors, resulting
      in higher cost of goods sold. Cost of goods sold excludes the distribution
      costs
      of purchasing, receiving, inspection, warehousing and handling costs; we include
      these costs in our selling, general and administrative expenses. Our gross
      margins may not be comparable to those of other entities since some entities
      include these distribution costs in the cost of goods sold. Distribution costs
      were approximately $801,000 and $654,000 for the six months ended June 30,
      2007
      and 2006, respectively.





Selling
      and administrative expenses increased by $901,000, or 33%, from $2,721,000
      for
      the six months ended June 30, 2006 to $3,622,000 for the six months ended June
      30, 2007. For the six months ended June 30, 2007, selling and administrative
      expenses were comprised of the following: $760,000 in selling expenses, $801,000
      in distribution costs and $2,061,000 in administrative expenses. For the six
      months ended June 30, 2006, selling and administrative expenses were comprised
      of the following: $396,000 in selling expenses, $654,000 in distribution costs
      and $1,671,000 in administrative expenses. The increase in distribution costs
      totaling approximately $147,000 was primarily attributable to the increase
      in
      sales, and to increased warehouse labor costs associated with our Florida
      operations which commenced in September 2006. The increase in selling costs
      totaling approximately $364,000 was primarily attributable to a $240,000
      increase in direct advertising costs and a $120,000 increase in sales
      compensation costs. The $390,000 increase in administrative costs is primarily
      attributable to approximately $117,000 in increased rent and utilities
      attributable to new warehouse and showroom facilities in New York and Florida,
      approximately $144,000 for increased payroll and related payroll costs,
      approximately $55,000 for legal and accounting fees in connection with a
      contemplated acquisition of a consumer electronics distributor and approximately
      $44,000 for increased depreciation and amortization. Total selling and
      administrative expenses as a percentage of net sales increased to 12.6% for
      the
      six months ended June 30, 2007 from 10.2% for the six months ended June 30,
      2006
      due to the factors previously described, offset in part by the increase in
      sales.





On
      April
      26, 2006, we announced that we would not acquire Foto Electric Supply Co.,
      Inc.
      (Fesco). An agreement to acquire Fesco had expired by its terms on February
      28,
      2006, and subsequent discussions to extend and amend the agreement ended. As
      a
      result, we recorded a charge of approximately $257,000 in the first quarter
      of
      2006 for costs in the terminated transaction.





Other
      income of $109,000 for the six months ended June 30, 2006 was primarily the
      result of insurance proceeds for replacement value of assets that were damaged
      as a result of a fire near the Company’s former offices in excess of book
      value.





Interest
      expense increased by $52,000, or 14%, from $374,000 for the six months ended
      June 30, 2006 to $426,000 for the six months ended June 30, 2007. The increase
      was primarily due to higher interest rates on bank borrowings and increased
      borrowings. The increased borrowing levels were the result of increased sales
      volume that required higher inventory levels and increased accounts
      receivable.





In
      the
      six months ended June 30, 2006, we recognized a tax benefit approximating
      $13,000. In the six months ended June 30, 2007 we did not recognize a tax
      benefit because realization of the additional net operating loss carryforwards
      is uncertain.





We
      recorded a net loss of $1,485,000 in the six months ended June 30, 2007 compared
      to a loss of $20,000 in the six months ended June 30, 2006. The principal
      reasons for the increase in 2007 were the decline in gross profit and the
      increase in selling and administrative expenses.




14





**LIQUIDITY
      AND CAPITAL RESOURCES**





For
      the
      six months ended June 30, 2007 net cash provided by operating activities was
      approximately $2,258,000, compared to $1,595,000 for the six months ended June
      30, 2006. The $663,000 increase in net cash provided by operating activities
      is
      principally attributable to changes in inventory (resulting in a net increase
      in
      cash provided approximating $4.1 million) and accounts receivable (resulting
      in
      a net increase in cash provided approximating $2.6 million), offset in part
      by a
      change in accounts payable (resulting in an increase in cash used by operating
      activities approximating $4.3 million) and an approximately $1.5 million
      increase in the net loss. The changes in accounts receivable principally reflect
      the seasonality of the business. The changes in inventory and accounts payable
      reflect both the seasonality of the business and lower purchases in
      2007.





Net
      cash
      provided by investing activities approximating $340,000 for the six months
      ended
      June 30, 2007 resulted from the receipt of $401,000 in proceeds from an
      insurance claim, offset in part by $61,000 which we spent for the purchase
      of
      property and equipment. Net cash used in investing activities for the six months
      ended June 30, 2006 approximated $213,000, of which $154,000 was for the
      purchase of property and equipment.





We
      used
      cash totaling approximately $2,506,000 in financing activities for the six
      months ended June 30, 2007, compared to approximately $1,560,000 for the six
      months ended June 30, 2006. For the six months ended June 30, 2007, bank loan
      repayments exceed borrowings by $2.5 million, compared to approximately $1.6
      million for the six months ended June 30, 2006.





Effective
      May 11, 2007, we amended our financing agreement (the “Agreement”) with
      Rosenthal & Rosenthal, Inc. ("Rosenthal"), pursuant to which the maximum
      credit facility, as defined, was increased from $10,000,000 to $15,000,000
      ($17,500,000 from November 1 to January 31 of each year), the interest rate
      on
      outstanding borrowings was decreased from the prime rate plus 1.5% to the prime
      rate plus 0.75% (but in no event shall the interest rate be less than 4.75%),
      and the termination date was extended to May 31, 2010. Borrowing under the
      credit facility are based on eligible inventory and receivables, due on demand,
      secured by substantially all of our assets and are subject to our compliance
      with certain financial covenants. In addition, our CEO and the Company's former
      President have signed limited guaranties in respect of borrowings under the
      Agreement.





Our
      amended Agreement expires May 31, 2010, unless earlier terminated by Rosenthal
      on 30 days' notice. At June 30, 2007, the interest rate on borrowings
      outstanding was 9%. In addition, we paid the lender a pro-rated fee of $25,000
      on May 31, 2007, and we are obligated to pay on each anniversary date an annual
      fee of 0.25% of the credit facility in effect on such anniversary date. The
      financing expense for the annual fee totaled approximately $23,000 and $25,000
      for the three months ended June 30, 2007 and 2006, respectively, and
      approximately $48,000 and $50,000 for the six months ended June 30, 2007 and
      2006, respectively.





In
      connection with establishing the initial Agreement, we issued to Rosenthal
      a
      warrant (the "Warrant") to purchase 500,000 shares of common stock at $0.10
      per
      share. The Warrant expires on November 30, 2010. On notice by us, the Warrants
      will expire earlier if the closing price of the common stock during a period
      designated in the Warrants is not less than $0.40 per share. The Warrants may
      be
      exercised by Rosenthal at $.10 per share for cash or on a cashless basis (i.e.,
      by deducting from the number of shares otherwise issuable on exercise a number
      of shares that have a then market value equal to the exercise price). We
      recorded a deferred financing cost of approximately $60,000 in the fourth
      quarter 2004, representing the fair value of the warrants, which is amortized
      over the initial three year life of the financing agreement. The financing
      expense recorded for each of the three months ended June 30, 2007 and 2006
      totaled approximately $5,000 and for each of the six months ended June 30,
      2007
      and 2006 totaled approximately $10,000.





Under
      the
      terms of the Agreement, we are required to maintain a specified level of net
      worth, working capital and debt ratios as defined. As of June 30, 2007 we did
      not comply with certain financial covenants, for which Rosenthal has provided
      a
      waiver. In
      addition, based upon current projections, we would require additional waivers
      for financial covenants at the end of the third and fourth quarters of
      2007.





We
      believe that we will have sufficient liquidity for the next twelve months and
      the foreseeable future. However, we would be materially and adversely affected
      if Rosenthal demands payment of these borrowings under the Agreement and if
      we
      are unable to refinance these borrowings.


15




**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**




Market
      risk represents the risk of changes in value of a financial instrument,
      derivative or non-derivative, caused by fluctuations in interest rates, foreign
      exchange rates and equity prices. We have no financial instruments that give
      us
      exposure to foreign exchange rates or equity prices.





Our
      pre-tax earnings and cash flows are exposed to changes in interest rates as
      all
      borrowings under our amended credit facility bear interest at the prime rate
      (but not less than 4.75%) plus 0.75%. As of June 30, 2007, our note payable-bank
      bore interest at 9%. As of June 30, 2007, a hypothetical immediate 10% adverse
      change in prime interest rates relating to the note would have an approximate
      $43,000 unfavorable impact on our earnings and cash flows over a one-year
      period, assuming the borrowing level remains consistent with the outstanding
      borrowings as of June 30, 2007, and based upon our reduced interest rate. The
      fair value of the borrowings under the credit facility is not affected by
      changes in market interest rates.




**ITEM
      4. CONTROLS AND PROCEDURES**





An
      evaluation has been carried out under the supervision and with the participation
      of our management, including our Chief Executive Officer and Chief Financial
      Officer, of the effectiveness of the design and the operation of our "disclosure
      controls and procedures" (as such term is defined in Rules 13a-15(e) under
      the
      Securities Exchange Act of 1934) as of June 30, 2007 ("Evaluation Date"). Based
      on such evaluation, our Chief Executive Officer and Chief Financial Officer
      have
      concluded that, as of the Evaluation Date, the disclosure controls and
      procedures are reasonably designed and effective to ensure that (i) information
      required to be disclosed by us in the reports we file or submit under the
      Securities Exchange Act of 1934 is recorded, processed, summarized and reported
      within the time periods specified in the SEC's rules and forms, and (ii) such
      information is accumulated and communicated to our management, including our
      Chief Executive Officer and Chief Financial Officer, as appropriate to allow
      timely decisions regarding required disclosure.




**PART
      2. OTHER INFORMATION**





**Item
      numbers 1, 1A, 2, 3,4 and 5 are not applicable and have been
      omitted.**




**ITEM
      6.**  **(a)** **Exhibits** **.**




31.1
      Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes
      Oxley Act of 2002.





31.2
      Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes
      Oxley Act of 2002.





32.1
      Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002.





32.2
      Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
      906 of the Sarbanes Oxley Act of 2002.





16




**SIGNATURES**





In
      accordance with the requirements of the Securities Exchange Act of 1934, the
      Registrant has duly caused this report to be signed on its behalf by the
      undersigned, thereunto duly authorized.





August
      14, 2007


Alliance
      Distributors Holding Inc.




By:
            /s/
              Jay
              GelmanJay
                GelmanCEO
                and Chairman of the Board




By:
            /s/
              Stephen AgressStephen
                  AgressExecutive
                  Vice President and Chief Financial
                  Officer




17